Farm Business: Economists Expect Another Year of Shortfalls for 2017

Economists painted a gray outlook for the farm economy and called for a stronger federal safety during a congressional hearing meant to set the stage for drafting a new farm bill.

Economists from USDA, the Kansas City Federal Reserve, Texas A&M and the University of Missouri all said farm finances look to dip in 2017 for the fourth consecutive year. Farmers are struggling, but not as bad as the 1980s yet and low prices are buoyed by higher yields.

Low interest rates and better-than-expected land values are also offsetting at least some of the concerns over higher debt-to-asset ratios.

The House and Senate Agriculture Committees are both ramping up hearings with the goal of getting a farm bill done by the Oct. 1, 2018. The Senate Agriculture Committee will hold a field hearing next week in Manhattan, Kansas.

In Washington, House Agriculture Committee leaders opened Wednesday’s hearing by pointing out that the farm economy has slipped since the last farm bill was drafted. The 2014 farm bill also so far is projected to cost $100 billion less than initially scored, mainly due to fewer people enrolled in nutrition programs.

That cost savings prompted Chairman Mike Conaway, R-Texas, to say lawmakers intend to start looking at the needs in rural America rather than just trying to hit a budget target.

“Because we were asked during the last Farm Bill — when times were good — to cut twice before measuring once, in the upcoming Farm Bill debate we will measure our requirements first and then determine what kind of a budget we will need to meet these needs,” Conaway said.

Rep. Collin Peterson, D-Minn., ranking member of the House Agriculture Committee, reiterated Conaway’s take of focusing on need over specific budget target. Peterson also said tremendous yield growth in and around his district have helped offset the low prices.

“So we’re not seeing the kind of pressure I expected we would be seeing at this point, but if these crop prices stay where they are at, and we get an average crop or a below average crop, we’ve got big problems,” Peterson said.

Joe Outlaw, an economist at the Agricultural and Food Policy Center at Texas A&M University, broke down data on 100 “representative” crop and livestock farms in 29 states that he and others track the farms’ cash flow and ability to maintain net worth or equity.

An overwhelming majority of the crop farmers tracked by the food policy center are likely to face serious cash flow problems in 2017, barring a strong price rebound. Still, those grain farmers weren’t as likely as other farmers to see large equity losses. “The cash flow situation is really bad, the equity situation isn’t quite as bad,” Outlaw said.

Outlaw noted crop insurance and commodity programs were helping farmers stay in business. The safety net has largely worked with the exception of cotton farmers. Still, Outlaw said farm programs will probably need to be increased.

He noted that farm income has fallen $23.7 billion since the last farm bill was passed while commodity program payments have been $13.2 billion, or a little more than half of the loss in crop receipts. Thus, in no way are commodity payments making farmer whole, he said.

Despite complaints from farm-bill critics, Outlaw said farmers are going need more support if the current market conditions continue. “Not only are programs not too lucrative, but there is a growing need to provide additional funding as adverse economic conditions are expected to continue,” Outlaw said.

Robert Johansson, chief economist for USDA, cited that farmers specializing heavily in certain commodities are seeing much higher debt-to-asset ratios. Close to 20% of farmers growing mainly wheat, cotton, poultry and hogs have debt-to-assets higher than 40%. These are the farmers most vulnerable at this point.

Along with that, the Federal Reserve recently cited a decline in new farm loans near the end of 2016, likely due to some tighter lending standards, but farmers also are tightening their expenses for items such as machinery.

“Credit availability at commercial banks has tightened, though we’ve seen little increase in delinquencies,” Johansson said.

Reiterating some of those points later, Scott Brown, an agricultural economist at the University of Missouri, cited that higher debt is hitting younger farmers harder than older ones. In Missouri, farmers age 35 to 44 saw debt-to-asset ratios double from 2012 to 2015.

Working capital for farmers also has decreased modestly each of the last three years and the rate in which farm loans are repaid has declined every quarter since mid-2013.

In helping younger farmers, Rep. Glenn Thompson, R-Pa., asked the economists how much a loan forgiveness program would help younger farmers. He’s proposing such legislation for federal loans.

DAIRY

Brown stressed the Margin Protection Program has not worked for dairy farmers the way it was expected to do. Overall dairy income went from $24.3 billion in 2009 to $49.3 billion in 2014. Dairy income then fell to $34.2 billion in 2016. As dairy prices became volatile, farmers stopped signing up for the MPP program, then they got burned in 2016.

MPP was supposed to act as an insurance on production costs. It has an annual signup and different levels farmers can sign up for and pay a premium. However, the program is not paying out much indemnity so farmers have enrolled less.

Peterson noted dairy producers are expecting a change that is going to pay them significantly higher than the current safety net. Peterson indicated he didn’t think that would happen. Further, if prices collapsed further, Peterson said farmers believe Congress would step into help.

“The dairy farmers I’m talking to think we’re going to come in and bail them out,” Peterson said. “And I don’t see that happening so somewhere we have to fine-tune this thing to get people to participate.”

Peterson suggested the one way to provide more insurance stability was to make it a five-year program for enrollment, much like commodity programs.

TAXES AND TRADE

One of the key issues in the tax reform debate is the border adjustment tax that would impose a tariff on imports. Numbers floating around would tax imports anywhere from 20% to 35%. Rep. Bob Gibbs, R-Ohio, gauged the economists on the idea, and indicated he wasn’t a fan of such a tax.

“To trigger a trade war, that would be really devastating to American agriculture,” Gibbs said. He added, “I think it’s raising a lot of red flags with a lot of people.”

Rep. Rick Crawford, R-Ark., brought up the proposal in Mexico to ban corn imports from the U.S. Crawford said he realized the idea was unrealistic, but wanted to know the impact. He added that Mexico also buys 25% of exported U.S. rice. “So while they made that statement on corn, I think it’s safe to say they would extend that to the rice industry as well,” Crawford said.

Pat Westhoff, director of the Food and Agricultural Policy Research Institute (FAPRI) at the University of Missouri, noted the importance of Mexico as an export market and the advantages of selling to a neighbor, but he added that corn is a global market.

“If you just rearrange trade patterns, the effect on the corn market may not be all that huge,” Westhoff said. “We sell products to countries that Brazil has formerly sold things to. The effect on the corn market is not as larger is if Mexico just disappeared from the corn market.”